Defense budget cuts hit businesses, localities

Jan. 30, 2013
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Lockheed Martin Aeronautics in Fort Worth, Texas, is the home of the F-35 Lightning II, where more than half the 14,000 employees support the Program. The Fort Worth plant is also home to the world's most prolific 4th Generation fighter, the F-16 Fighting Falcon. / Lockheed Martin

by Tim Mullaney, USA TODAY

by Tim Mullaney, USA TODAY

The Lockheed Martin executive was two years out of her internship when then-Defense Secretary Dick Cheney killed the A-12 bomber. On Jan. 7, 1991, a unit of General Dynamics (the division is now part of Lockheed) responded by firing 4,000 workers here, in a one-day swoop as devastating as a bomber run.

"I'll never forget,'' says Lauderdale, now general manager of aeronautical operations at Lockheed's 14,200-worker location here, including the factory making F-35 fighter planes. "They brought in crates of boxes, people put boxes on their chairs and rolled the boxes out to the car. You saw a sea of green, because the chairs were tan, with green seats.''

Two decades later, America is entering another round of deep defense cuts. As Washington debates "sequestration'' - automatic budget cuts that threaten to slash $600 billion from the Pentagon budget by 2023, beginning March 1 - the defense industry, and cities that depend on it, know sequestration isn't even half the problem.

Add in another $487 billion, 10-year defense cut in 2011's debt-ceiling legislation. The end of wars in Iraq and Afghanistan mean the separate budget for that, once $160 billion annually, now $88.5 billion, will wind down, too. Altogether, a budget that peaked at $716.3 billion in 2012 has dropped to a requested $701.8 billion this year and is set to hit $589 billion by 2014.

It could go much lower with sequestration, although still well above the $294 billion spent in 2000. That's about $392 billion in today's dollars.

"We've assumed for planning purposes that the worst-case scenario will happen, that there will be a trillion-dollar defense budget reduction,'' Dennis Muilenburg, president of Boeing's defense business, told an investor conference in November. "Our expectation is that it'll be somewhere in between, perhaps halfway in between'' the $500 billion slashed in 2011 and the $1.1 trillion planned total over 10 years, he said.

1 million jobs â?? and counting

All in, defense conversion is a top economic issue, alongside health care spending, trimming the deficit and capitalizing on shale energy .

Sequestration and the 2011 cuts could kill 1 million jobs, not counting spinoff effects, says George Mason University economist Stephen Fuller. Half of the cuts are likely to hit about 15 states from Virginia to Texas, Moody's Analytics economist Chris Lafakis said

"In some ways, it's a wake-up call,'' said Fuller, who has done paid research for the defense-aeronautics industry. "You have to be less dependent on defense, because there's not going to be as much money around.''

How tough things get will vary from company to company - and from city to city. Companies are crafting warnings for different audiences. In a meeting with Wall Street analysts, Lockheed Martin last week emphasized its 20% total return to investors last year. In a visit to Capitol Hill, Executive Chairman Bob Stevens testified to Congress last summer that sequestration would cost 10,000 jobs on top of Lockheed's 18% staff reduction since 2009.

Defense stocks actually beat the market last year. Muilenberg says the business will still generate $2.9 trillion in revenue in the next decade. The economic damage depends on perspective - and on how a company or a city responds.

Big, diversified cities such as Fort Worth will do better than others, said Steve Cochrane, director of regional economics at Moody's Analytics.

Major contractors will likely fare better, because such contracts are multiyear deals with huge backlogs. Companies in data-processing or those making parts for bigger vendors have shorter contracts and face risk sooner, Fuller said.That threatens cities such as Charleston, S.C. - home to myriad smaller contractors, many in information technology.

Across the U.S., 47 metro areas get more than 5% of local gross domestic product from defense contracts, according to an analysis for USA TODAY by Moody's Analytics. They include Washington, D.C. (11%), as well as Oshkosh, Wis. (87%). Those figures don't include the economic contributions of military personnel on bases in the areas.

Slow-growth towns such as Huntsville, Ala. (23%, led by missile work) and St. Louis (7.4%, largely, Boeing's F-15 and F-18 operations) will suffer more because they have fewer healthy replacement industries, Cochrane said. But even well-prepared towns such as Fort Worth, where Lockheed has laid off 260 F-35 workers this year, will feel it. Los Angeles, which took the brunt of defense cuts in the 1990s, has never recovered its former share of total U.S. jobs, according to the Center for Continuing Study of the California Economy.

Scott Spiker knew he was in trouble after visiting one of Fort Worth's two big defense contractors last spring. The president of First Command, a financial-planning firm, Spiker was chairing the local United Way campaign, and layoffs clobbered donations.

"Between American Airlines' bankruptcy and the defense cuts, we missed our budget by a million and a half,'' Spiker said. "The defense contractors have a huge trickle-down effect in this community.''

The biggest contractor, locally and nationally, is Lockheed, and the debate that most threatens Fort Worth is the F-35, which employs 9,500 locals at Lockheed alone. Like most big programs, the stealth-technology F-35 has been marked by cost overruns and arguments about whether it's right for the times.

The Pentagon is scheduled to buy 2,443 planes by 2037, and allies may buy another 1,400. They're $103 million apiece, which Lockheed Vice President Steve O'Bryan says will fall to $65 to $70 million as volume rises. The program could cost another $1 trillion over 52 years in long-term maintenance. Lockheed spokeswoman Laura Siebert said that figure, which includes assumptions about future inflation, is expected to be less than what it would cost to maintain the planes the F-35 will replace.

The F-35 is designed to replace a long list of planes, doing jobs from dogfights to attacking ground targets and reconnaissance. It will let the U.S. fight diverse conflicts in an unpredictable world, easily coordinating with allies, said O'Bryan, a former Navy pilot.

"The same airplanes we used in (1991's) Operation Desert Storm, we're still using today,'' O'Bryan said. "We've put some miles on them.''

But the plane's a budget-buster, said Todd Harrison, senior fellow at the Center for Strategic and Budgetary Assessment.

Last fall, the center published results of a conference in which seven teams of experts pondered how to cut defense by 30%.Every team cut the F-35 budget by at least a quarter, while one proposed killing the program, Harrison said.

"It's not necessarily that they wanted to,'' Harrison said. ``It's the largest program in the DOD. That alone makes them a target.''

Lockheed â?? and Fort Worth â?? have a two-fold strategy.

First, protect the F-35 program as much as possible, Second, officials have helped diversify the local economy since 1991, and they'll try to help find new opportunities for thousands of workers who might be displaced. Third, they're developing other projects â?? including a federally financed $900 million downtown redevelopment â?? to diversify even more.

Lockheed built the F-35 program to give it as many constituencies as possible. Subcontractors in eight countries helped plan the plane, and governments of two others have bought it. F-35 subcontractors employ 41,300 Texans, Lauderdale said, part of a supply chain that draws on suppliers from 47 states.

The most important constituency is the Pentagon itself, which has jammed through orders to build F-35s before cuts hit.

The company secured 31 orders in the fourth quarter and expects another 36 early this year, Lockheed said last week. In addition, the company expects 48 planes to be funded by the U.S. and other countries in the first half of 2013, Chief Financial Officer Bruce Tanner said.

But if it doesn't work ...

If cuts come, Fort Worth is ready, city leaders insist.

As in 1991, the plan is to protect defense while building up other jobs, some with public money. Local officials, almost all Republicans, also vow to help laid-off workers use retraining programs popular nationally among Democrats.

"Since we have been there before, these are not new programs,'' said Jay Chapa, the city's housing and economic development director. "You spend your time on things you can control.''

Twenty years ago, the plan's keystone was then-new Alliance Airport, the nation's biggest all-cargo airfield. The city worked to help developer Ross Perot Jr. lure manufacturers and distributors to business parks around Alliance, said Bill Thornton, president of the Fort Worth Chamber of Commerce.

It worked. Metropolitan Fort Worth has added 100,000 jobs since 2004. Local unemployment is 5.8%, well below the national 7.8% rate.

Tenants at Alliance, such as GE Transportation Systems, help drive manufacturing. The billionaire Bass family poured money into downtown. The Dallas-Fort Worth area has 20 Fortune 500 companies headquartered there.

The city is prepared to pour more money into downtown this time. The Alliance area is only 40% developed, Thornton said. On the drawing board is Trinity Vision, a $900 million new entertainment district with 10,000 housing units - of which the Army Corps of Engineers will pay half.

Then there is Fort Worth's ace in the hole - hydraulic fracturing.

Having sparked a boom in new oil jobs, fracking adds a 5% "security blanket" to the size of the local economy, Thornton estimates. It hadn't been commercialized in the 1990s.

"We're not the fastest-growing city in America the last five years by accident,'' Thornton said.

But not everyone buys that scenario.

Lockheed's workers have specialized skills that won't transfer easily to other local employers - especially not at such salaries as its $60,000 average union wage or $106,000 average for salaried workers, Lauderdale said.

In 1991, many of her colleagues left the industry or left town. As successful as Fort Worth's aeronautics business has been, it couldn't accommodate everyone if Lockheed made big cuts, she said.

"Not by any measure could it absorb what this concentration of workers here might shed,'' Lauderdale said.

The worry spreads out from there. The Ridgmar Mall near the Lockheed plant "lives and dies'' with the fortunes of the company, Chamber communications director Audra Bennett-House said.

Defense cuts would hit the housing recovery in West Fort Worth and northside neighborhoods near Lockheed just as the market is trying to recover, said Mike Bowman, who started his Century 21 real estate office after being laid off from Bell Helicopter himself 40 years ago.

``It would be a massive problem,'' said Steve Andrews, president of the United Auto Workers local organization, which represents workers at Bell Helicopter, the second-biggest defense contractor in town. "I hope and pray it doesn't come to that. The cars that get sold here, the houses that get bought and sold, depend on defense.''